Importance of Credit Ratings in Equity Research

In this post with an example I’ll try to explain the Importance of Credit Ratings in Equity Research.

Before we get into the main topic, if you don’t know what is Credit Ratings of a company, please go through this and get back.

Now that you have an idea about credit ratings, lets take an example of a company Vimta Labs.

Vimta Labs Fundamentals

RatioValue
Market Price as on 19th July 2019153.35
52 Week High/Low342.90/150.25.10
Price to Earning13.30
Price to Book1.96
PEG Ratio0.97
Debt to Equity0.15
Change in promoter holding in last one year0.00%

The financials look decent to enter into this stock at this price of Rs:153. However, CRISIL has recently updated Vimita Labs outlook as ‘suspended’ for both long term and short term credit rating. This being the case, it is better to avoid such companies, as this might be a signal of possible credit distress.

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Company Analysis: Meghmani Organics

Meghmani Organics is one of the key players in Agro chemicals Sector. They are one of the popular pesticides & pigments producer in India. Company has good potential for growth and capable to compete with established giants in this Sector.

Meghmani Organics pricing seems attractive at Rs: 63.85 as on 14th March 2019, matching my investment philosophy. Below are the parameters that suggested that it was time to enter the company.

Meghmani Organics Fundamentals

RatioValue
Market Price as on 14th Mar 201963.85
52 Week High/Low114.40/42.10
Price to Earning6.92
Price to Book1.84
PEG Ratio0.12
Debt to Equity0.44
Change in promoter holding in last one year0.35%

Summary: Market price is closer to its 52 week Low. Price to book value is very attractive. Debt is reasonably low. PE is 3 times lower than its peers from same segment. PEG is less than 1. Promoter holding has increased by a small amount in last one year, but it is definitely a good sign. Company has good consistent profit growth of 57.45% over 5 years.

You may want to check out ingenious portfolio.

Company Analysis: Tech Mahindra

Tech Mahindra is one of the Large Cap IT companies in India which has good potential for growth, and compete with already established IT giants in India.

Tech Mahindra pricing seems attractive at Rs: 787 as on 14th March 2019, suiting my investment criteria. Below are the parameters that suggested that it was time to enter the company.

Tech-Mahindra Fundamentals

RatioValue
Market Price as on 14th Mar 2019787
52 Week High/Low603.10/840.10
Price to Earning17.68
Price to Book3.73
PEG Ratio0.81
Debt to Equity0.13
Change in promoter holding in last one year-0.02%

Summary: Market price is not around its 52 week High. Debt is very low. PE is lower than its peers in the same segment. PEG is less than 1. Promoter holding has not changed much in last one year.

My Investment Approach: My investment approach regarding this stock is to accumulate over next few months, if the price stays range bound.

Sectors Or Themes of my choice for 2019

I’m capturing top few industries/ sectors that have good prospects in medium (5 years) to long (10 years) term.

This is purely my perception based on my investment acumen & investment horizon.

List of potential sectors and Themes

  • Aviation – because this industry it is just picking up in India. Best time to ride the tide.
  • Pharma – For past couple of years there has been a series of misfortune for Indian pharma companies in that form of USFDA approval issues. Non compliance of manufacturing facilities in India etc.
  • Automobiles & Auto Ancillaries – Good corrections in price is seen in few companies in recent few months, very good time to enter now.
  • Public Sector Banks – for the need of debt and recently most of the public sector banks have corrected.
  • Consumption (Paints, Tyres etc.) – Prices are reasonable in some scrips, but in dips.
  • IT – Future is all about ‘Automation and Artificial Intelligence’, and this is one sector that is going to benefit from this. Though stocks in this sector are bit costly now, I’d like to start investing in few large and medium sized companies which have seen some recent corrections. Idea is to buy at dips.
  • Agriculture – With lot of focus on Agriculture related reforms

Above are the few sectors and themes that I’m considering as part of my stock picking approach. Readers are advised to get help from certified investment advisors before making any buy or sell decisions based on my blog posts.

My Stock Picking Work Flow

I am planning to capture my stock picking techniques over a period of time. My style of stock picking is kind of contrarian in nature. I am planning to have a list of 10 to 15 stocks in my portfolio. My Investment horizon is minimum 10 years. Most of my stock pics would be value stocks, with very few growth stocks. The intention is to come up with a portfolio that outperforms Sensex during the course of time.

What aspects do I consider while picking a stock

I’d be considering below aspects to come up with potential companies to buy.

  • Current Market Condition: Though this is not very important one most of the times. However, it is a fact that when the Markets correct most of the stocks correct, so it definitely helps in decision making.
  • Which sectors or themes have long term potential for growth
  • Among these industries which companies have potential for Growth
  • Rational for buying the shares of a particular company

I’ll be covering the above aspects in separate posts.

Disclaimer: I or ingenious investor are not responsible for any profit/loss incurred by the reader because of buying or selling the stocks mentioned in this blog.

The Stock Market Crash of 2018

In this post(Last updated: 29th Nov 2018) ‘The Stock Market Crash of 2018’, I’ve recorded the weekly Sensex movement till sign of recovery. I have also capture some of the macro events during that time.The main intention for doing this is to get a comprehensive view on how the markets behave, what are the macros at the time and which industries behaved how. I’ve captured my investment advice during that period.

Macro situation playing at the time:

  1. Rupee has fallen to historic lows(1$=₹73.77, 5th Oct), and continues
  2. Oil prices are historic high in India
  3. There have been major issues from past few months in the Indian financial sectors:
    Most of PSU Banks have higher NPAs
    Punjab National Bank scam
    RBI rejects Yes Bank CEO Rana Kapur’s reappointment
    IL&FS debt issue
    BJP is accused of foul play in Rafale deal, by making the project awarded to Reliance
  1. Trade war between US and China is going on.
  2. Trump has commented that he’d revise the rates with India.
  3. On 30th Oct, India and Japan signed a multi-year currency swap agreement, which will ease both countries to be less dependent on US dollar for their trades.
  4. Nov 9th, the markets were volatile this week (5th to 9th Nov) with resistance to downward movement, and ended positive with respect to week’s opening price. This week seems to be start of trend reversal.

Though some of the above had already occurred, Indian stock markets were behaving awkwardly till it peaked in Aug 2018. Sensex and Nifty50 were gaining(thanks to few large caps in the index), while Mid-Cap, Small-Cap and Micro-Caps were collapsing. This was sufficient to suspect a major correction in near future.

On 24th Sep 2018:

Sensex lost 1.46%(536 points), Nifty50 lost 1.58%(175 points), Nifty Smallcap 100 lost 2.60%(179 points) and Nifty Midcap 100 lost 2.72%(499 points).

don’t make any investments until markets stabilise.

On 6th Oct 2018:

The carnage continued …

Sensex & Nifty further dropped during the last week.

Look at the below Sensex five day chart:

Clear sign of panic selling. don’t make any investments until markets stabilise.

On Oct 14:

This week, 8th to 12th Oct, markets were trying really hard to pull up, but every time it seemed pulling up, there were sudden drops to pull it back towards lower value. The below image shows the same:

don’t make any investments, as markets haven’t stabilised yet.

Markets 15th October to 19th October:

The down trend continued. There was positive movements from 15th & 16th, but on 17th to 19th it went negative(18th was holiday). Below image shows the week’s movement. 1$ was equal to ₹73.32 on 19th Oct.

don’t make any investments until markets stabilise.

From Oct 23 to Oct 29:

Ray of hope ?

In this week market kind of bounced back. On 26th Oct Sensex seemed to have hit its bottomed.

don’t make any investments yet, as markets have to show positive trend for at least another week.

From Oct 29 to 2nd Nov:

Sensex moved up from 33411 to 35011, about 4.5%, in this week. This looks like trend reversal. Main event that took place in this week was; Indian and Japan signed $17-billion currency Swap multi-year agreement. This would help curtail Rupee depreciation against dollar.

From Nov 5 to Nov 9:

Markets continued its upwards trend from last week and ended positive. This affirms trend reversal. You may carefully start investing long term in attractive companies, post research.

Crude price have been falling, and that is the reason for the uptrend from last two weeks.

From Nov 12 to Nov 16:

In this week MP Ananthkumar of BJP passed away, this impacted the upward trajectory it Sensex, with a price drop on 13th.

However trend caught up during the rest of the week and ended higher than the week’s opening price.

From Nov 15 to Nov 23

The Sensex fell this week, reason for the drop isn’t very clear. It seems like Sensex would be range bound around this week’s low for some time, or might drop further down before recovering. I’d recommend not to make any fresh investments at present.

Sensex had crashed 17% in about 3 months, between 29th Aug(Sense: 38989) to 26th Oct 2018.(Sensex: 33291).

Now, Sensex, has shown signs of reversal from 5th Nov onwards.

Advice for the long term investors:

As there were good amount of corrections in many good companies, below was my strategy during the  stock market crash of 2018, which holds good during any corrections in future as well:

(1) DON’T FOLLOW THE CROWD, don’t panic sell your holdings. Just stay invested.

(2)This is for sure one of the greatest opportunity in India Market to buy your favourite, quality stock and make handsome profit over long term.

(3) Monitor your favorite stock for its price movement, and start accumulating in dips.

(4) Most important: Be patient, it may take weeks, months or even years for market to stabilize and recover.

(5) Though I’m not recommending this; I’m Just emphasizing on the opportunity: These may be considered the times when someone need not know much of fundamental analysis or company valuation, and still make money by investing in popular, old, large cap companies, by following the above mentioned strategy and staying invested longer.

Conclusion:

Hope you like the analysis of ‘The Stock Market Crash of 2018’. Be cautious, and make your investments only when the  price drops to a level which is comfortable for you to invest with long term horizon in mind. You may want to have a look at our model portfolio

image credit: www.moneycontrol.com

How to subscribe to an IPO without a broker

In this post I’ll explain how to subscribe to an IPO without a broker. This is one of the less known aspects of equity investments.

Steps to be followed for IPO subscription through your bank’s internet banking facility, assuming your bank has ASBA facility. Most nationalized banks have this facility. In the  below example, I’ve shown BOI screens, the navigation would vary for different banks.

Step 1: Login to your internet banking:

Step 2: Go to Requests Tab and Select ASBA IPO Request

Step 3: Select ASBA IPO Request (on side menu)

Step 4: Navigate to Bid Cum Application section

Step 5: Fill up bid form and Submit

Step 6: Wait for confirmation on allotment, if allotted the shares will reflect in our DP account after the allotment process is completed.

Hope this post helps!

To view a model portfolio of stocks, which has give 66.5% returns till date and 270% returns, excluding current year investments, click here .

You may also be interested to know  why ‘I Subscribed to HDFC AMC IPO‘.

When to and When Not to sell a stock

More than buying a Stock, selling is more tricky. A common question among most investors is : When to and when not to sell a stock.

Below are some of the reasons for selling a stock:

  1. When your target price is achieved. ( one caveat here is , the share price may go up even after you have sold (booked profit)
  2. You realised you made a bad choice and invested in a potential looser; Exit ASAP even if you made a loss.
  3. If you realise the Management isn’t being transparent and involved in book manipulation or involved in fraud etc.
  4. A better investment opportunity which would give a better return is available
  5. If the company has shown consistent underperformance for few years, shows no signs of recovery
  6. When you expect a major correction as valuations have reached multiple times above median PE.(Sell High and Buy Low)

Etc.,

Below are some of the reasons for NOT selling a stock

  1. When some random advisor says to sell the stock
  2. When there is correction in market or stock. ( don’t sell in panic)
  3. You don’t see any major movement in the share price for very long
  4. When there is no better investment opportunity
  5. If the conviction with which you brought the stock still holds good at present
  6. Try not to book profit within one year from date of purchase, as you have to pay tax on your gains.

Etc.,

The above are compilation of points based on what I’ve read, understood and some from my own experience. Feel free to share your thoughts on ‘When to and When Not to sell a stock’ in comment section, I’ll update the post accordingly.

Is It time to start buying stocks ?

Is It time to start buying stocks ?

There is no right or wrong time to buy stocks. However, general rule of thumb is if you realize the market or a segment (large, mid, small, auto, pharma etc.,) are falling, then chances are that you may get your favorite stocks at a discount, due to herd mentality of market participants, especially novice retail investors. Many of us might often have this question “Is it time to start buying stocks?”

From Oct 2018 to Feb 2019, many small and mid cap companies have seen steep fall, and few large caps have shown corrections too. My advice is to keep a watch on your favourite companies and ‘buy at dips’ , as many good companies have already or would, come to buying range soon.

Avoid Panic Selling!

Many Companies which gave hefty returns last year have fallen. Many retail investors have sold in Panick too. But, it is the right time to enter into some good companies for long term.

Stocks are falling as many FIIs are exiting Indian markets. But for a retail or Indian investor this is a great opportunity to enter markets. These kind of opportunities comes once in a decade.

Staggered buying: Buy in chunks

The strategy for buying during big market corrections are:

1. Make list of well managed large and mid caps.( the ones which you always wished to have in your portfolio).

2. Arrive at purchase price for each of them either based on Value or Growth I potential.

3. Prioritise them based on potential returns.

4. Monitor the regularly for stocks which come to YOUR buy price range.

5. Start accumulating them with each correction.

Remember “Be greedy when others are fearful”

Always do your own research before buying the stocks.

Turning bad news or a crisis into profit

Turning bad news or a crisis into profit is one of the key traits of a long term equity investor.

What does bad news mean ?

Bad news or a crisis is something which creates panic in the market, especially by novice or amateur investors. Some of the examples of bad news could be:

  • Exit of a CXO / President / Founding member of a company
  • Failing to adherence to quality norms, in F&B, Pharmaceutical sectors etc
  • Some violence or Strike in the company
  • Etc.,

How can an Investor benefit from it ?

If we take the current situation of the Inter Globe Aviation (Indigo), where the company announced the  departure of  its President & Whole time director Aditya Ghosh. Adding to this, the company has performed poorly during the Quarter ending March’18. This has led to a steep fall in its share price in last four trading days:

Which shows ~20% drop during this period. This definitely looks like a good buying opportunity.

But, Is this single factor enough to make a buying decision ?

Yes and No.

Yes, if the Company:

  • Is well know in its sector.
  • Has good track record of earnings and profits
  • Is one among the top two companies in that industry

No, if the above mentioned points aren’t true for the company. In that case it may just be another company going towards bankruptcy. It would be better to avoid buying the stock.

Will I bought Inter Globe Aviation (Indigo)?

I bought Inter Globe Aviation (Indigo), Not just because of the steep price drop. But also due to other positive factors about the company:

  • Largest fleet operator in India, with over 1000 flights per day
  • Has performed better than peers on flight schedules
  • In Flight crew is well behaved when compared to SpiceJet or Jet Airways
  • Handles crisis well, for instance: smoothly handled situation when recently Aviation Regulator Directorate General of Civil Aviation  grounding of A320 Neo flights.
  • Future cash flow value per share is Rs: 1884, so current share price is at least at 25% discount.
  • P/E and PB are on a higher side, but this is the risk that an invertor should be ready to take.
  • Expected annual growth rate is ~19.8%
  • Revenue growth is expected to be better than its peers and to that of the Market

Please be advised that me buying the stock doesn’t qualify for other to buy, so this is not a buy recommendation from me, rather it is my view on the company.

You may be interested to have a look at model portfolio for educational purpose here.